There was big positive news for AECO gas prices on Wed when TransAlta announced it was accelerating its transition to clean power in Alberta [LINK]. This is their transition out of coal. Their announcement is significant because it specifically says natural gas is directly replacing coal in powering certain coal units. TransAlta says they a converting “Sundance Units 3 to 6 and Keephills Units 1 and 2 from coal-fired generation to gas-fired generation in the 2021 to 2023 timeframe, thereby extending the useful life of these units until the mid-2030s; and effective immediately, taking steps to secure the gas supply required for the converted units (expected to be up to 700 million cubic feet of gas per day at peak levels of demand), including the construction of the required pipeline.” A peak of up 0.7 bcf/d of new natural gas demand for TransAlta is a big plus for AECO starting in 2021.

Cheniere’s analyst day [LINK] provided another view that the global LNG oversupply is going to be fixed around 2020/2021 and tip into undersupply, whereas the general view coming into 2017 was that it wouldn’t be fixed until 2023 to 2025. These views on when LNG tips to undersupply are directly relevant to Cdn natural gas because global LNG markets now have a major impact on Henry Hub (HH) and AECO gas prices. This winter proved this fact, and it means there is a new way of looking at HH and AECO gas prices. The “structural” changes that started to increase as gas prices dropped in 2014, began to materially (and positively) impact gas prices this winter, and should have an increasing impact thru 2022. US natural gas exports have materially changed the dynamics in a positive way for HH and AECO gas prices, which means global natural gas and LNG markets are now new drivers of HH and AECO prices. And it is why the increasing views (such as Cheniere’s this week) for the potential that the global LNG oversupply gets fixed closer to 2020 should be noted as it could be the major factor that will set the tone and valuations for Cdn natural gas in 2018 and 2019. Plus it is timely to look at this now as we would expect analysts and investors to take a new look at their 2018 and 2019 natural gas thesis in Q3/17, ahead of going into the winter.

We weren’t surprised to see Cenovus step up to buy high quality heavy oil assets or strategic investors take control of Northern Blizzard given that the fundamentals driving narrower than expected Cdn heavy oil differentials in 2017 are likely to continue in 2018 and beyond. Cdn heavy oil is trapped and has no option but to sell to the US. But the US is effectively trapped and primarily relies on Canada, Mexico and Venezuela (to a smaller degree Colombia) for its heavy oil supply. And with Mexico and Venezuela continuing to be in decline, the basic supply demand fundamentals continue in a positive trend for Cdn heavy oil. Volatility and seasonality will still be here, but the positive trends mean it is less likely to see Cdn heavy oil differentials blow out for any extended period or to the same $/bbl magnitude as seen in 2014.

The “new” global LNG development emerging from Gastech in Tokyo is the flow of reports and announcements this week that there is significant action being taken to put LNG bunkering (refueling) in place. LNG bunkering is the needed first step for LNG to capture market share when the new Jan 1, 2020 lower sulphur rules force ships to either use low sulphur fuel, add scrubbers, or switch to LNG. This is an important development – without LNG refueling logistics, LNG fueled ships and tankers (either reconfigured or new builds) won’t grow. If LNG can capture 10% of this market, it can add ~2.6 bcf/d of demand, which would be equal to ~1 year of demand growth, and bring forward by ~1 year the expected time when LNG markets move from oversupply to undersupply.

There was information overload at the big Gastech natural gas and LNG conference in Tokyo this week. So no surprise, the initial reporting has been on the well known themes – current LNG oversupply and its impact on LNG prices and need for lowest cost liquefaction. But as always happens, once analysts get back to their offices, they then look for what has changed or emerged in the last year. Three of these changed/new themes are more calling for the LNG oversupply to be corrected sooner than expected, increasing impact of FSRUs in 2017, 2018 and 2019, and acceleration of the needed LNG fuel infrastructure for LNG to fuel tankers and ships.